Interaction with other provisions
Australia's implementation of the Global Anti-Base Erosion Model RulesExternal Link (GloBE Rules) includes consequential amendments to Australia's income tax law to clarify its interaction with Pillar Two. The amendments are included in the Multinational—Global and Domestic Minimum Tax (Consequential) Act 2024External Link.
In particular, the Consequential Act includes amendments to specific Australian cross-border tax provisions. These include rules concerning foreign income tax offsets, controlled foreign companies, hybrid mismatches and foreign hybrids.
Foreign income tax offset rules
Australia's foreign income tax offset (FITO) rules do not provide a foreign tax credit for taxes paid under a foreign income inclusion rule (IIR) and foreign undertaxed profits rule (UTPR).
However, to the extent you satisfy the usual eligibility criteria and integrity rules, a FITO may be claimed in respect of foreign domestic minimum top-up tax (DMT) paid on income included in your Australian assessable income.
The amount of the FITO allowed in respect of foreign DMT taxes is subject to an additional safeguard.
New FITO integrity rule for foreign DMT taxes
The amount of DMT tax which an entity is treated as having paid is reduced by:
- the amount of a refundable tax credit that is refunded to an entity because the credit exceeds income tax liability
- consideration received for the transfer of a transferable tax credit to which an entity was entitled in respect of a foreign income tax of that jurisdiction
- cash or cash equivalent amounts recognised as government grants under International Accounting Standard 20 (or a comparable accounting standard applicable under a foreign law)
- a benefit of a kind specified by the Minister in respect of a specified jurisdiction.
This new integrity rule complements the existing FITO integrity rule. The existing rule reduces the amount of foreign income tax that an entity is considered to have paid:
- to the extent it is entitled to refunds of the foreign income tax, or
- by any other benefits worked out by reference to the amount of foreign income tax.
Example: New FITO integrity rule for foreign DMT
Entity A (a constituent entity located in unlisted country Jurisdiction A) is a Controlled Foreign Company (CFC), wholly owned by Aus Co, which is part of the same multinational enterprise group (MNE group).
Jurisdiction A has a corporate tax rate of 10% and has enacted a Qualified Domestic Minimum Top-up Tax.
Entity A receives a $6 grant from the government of Jurisdiction A (recognised as a government grant under an applicable accounting standard).
Entity A derived $85 of attributable income, which is wholly attributable to Aus Co. In arriving at the $85 of attributable income, a notional deduction of $10 for corporate income tax and $5 for a foreign DMT tax paid in Jurisdiction A is claimed.
Assuming other relevant conditions in the FITO rules are satisfied, the amount of FITO that could have been available for Aus Co would have been $15 (the combination of $10 CIT and $5 DMT), disregarding the new integrity rule.
However, under the new integrity rule, the FITO is reduced by the government grant ($6), capped at the amount of foreign DMT tax paid ($5).
Therefore, the FITO allowed is $15 - $5 = $10.
End of exampleControlled foreign company rules
The CFC rules work to attribute foreign income earned by a foreign company back to Australia in certain circumstances. The interactions between the CFC rules and Pillar Two are such that:
- Tax imposed under CFC tax regimes (including Australia) are taken into account when calculating the effective tax rate of a jurisdiction for Pillar Two purposes.
- Foreign DMT, IIR or UTPR taxes are excluded from the meaning of ‘subject to tax’ for CFCs and transferor trusts located in a listed jurisdiction under section 324 of the Income Tax Assessment Act 1936 (ITAA 1936). This will also impact whether certain income is considered eligible designated concession income (EDCI) and therefore taxed in Australia.
- Taxpayers are precluded from notionally deducting foreign IIR tax and foreign UTPR tax in calculating attributable income under section 393 of the ITAA 1936.
- A notionally allowable deduction may be available for payments of foreign DMT tax.
Australia's Qualified Domestic Minimum Tax (QDMT) is given priority in its application to Australian income and does not take into account taxes imposed under other CFC tax regimes.
Example: Eligible designated concessional income
Australian Entity A Co is an attributable taxpayer in respect of B Co, which is located in an overseas listed country. The listed country has implemented the IIR, UTPR and DMT.
The listed country applies a QDMT, which includes an item of income from B Co in its Effective Tax Rate (ETR) calculation. This income is otherwise exempt for corporate income tax purposes in the listed country.
In determining whether the item of income has been subject to tax in a listed country, the taxpayer is required to disregard any imposition of GloBE taxes (IIR, UTPR and DMT). The item is still considered as EDCI.
The taxpayer is also entitled to a notional deduction for any foreign DMT paid in respect of the EDCI included in its notional assessable income.
End of exampleHybrid mismatch rules
The operation of Australia's hybrid mismatch rules broadly continues to operate unaffected by the Australian global and domestic minimum tax.
Foreign DMT, IIR or UTPR and other foreign minimum taxes are disregarded when determining if an amount of income is subject to foreign income tax per the hybrid mismatch rules under section 832-130 of the Income Tax Assessment Act 1997. This ensures that a hybrid mismatch can be identified irrespective of whether a jurisdiction has implemented an IIR, UTPR or DMT.
The disregarding of such taxes also applies in the context of Australia's targeted integrity rule in Subdivision 832-J. Specifically, a foreign GloBE tax does not impact whether a payment of interest or an amount under a derivative financial arrangement is subject to foreign income tax at a rate of 10% or less. However, the application of foreign IIR, UTPR and DMT taxes may still be a relevant factor under the principal purpose test in determining whether it is reasonable to conclude that an entity entered a scheme with the requisite purpose.
Foreign hybrid rules
Similarly, Australia's foreign hybrid rules broadly continues to operate unaffected by the Pillar Two regime.
Australia’s foreign hybrid rules ensure that an entity that qualifies as a ‘foreign hybrid’ is treated as a partnership (rather than a company) for Australian tax purposes.
One of the requirements for entities to be treated as foreign hybrids is that no foreign income tax is imposed on the entity itself. References to 'foreign income tax' do not include foreign IIR, UTPR and DMT taxes and other foreign minimum taxes, ensuring that the foreign hybrid rules are not impacted by a foreign jurisdiction's decision to impose such taxes at the level of the foreign hybrid entity.
Example: Foreign hybrid limited partnership
Polar LLP is located in Jurisdiction A. AusCo, located in Australia, is a limited partner of Polar LLP. Under the corporate income tax regime of Jurisdiction A, Polar LLP is treated as fiscally transparent, and the imposition of taxes are on partners of Polar LLP of which AusCo is one.
Assuming all other relevant conditions are met under Australia’s foreign hybrid rules, Polar LLP is treated as a fiscally transparent partnership for Australian tax purposes. One of the requirements to be met is that foreign income tax is imposed on the partners of Polar LLP (including AusCo) and not on Polar LLP itself.
Jurisdiction A implements a IIR, UTPR and DMT, and legislates for these GloBE and DMT related liabilities to be imposed on limited partnerships (such as Polar LLP) instead of on its partners.
AusCo is required to disregard the imposition of those taxes on the partnership and will continue to treat Polar LLP as a foreign hybrid limited partnership under Division 830.
End of exampleMore information
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